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U.S. Economic Data & Market’s Concerns On Omicron

U.S. stocks closed lower on Friday, 3rd December 2021, for the week although off the lows after some last-minute buying. 

The Nasdaq -1.92% saw most of the selling again, while the S&P -0.84% and Dow -0.17% also finished lower.  

The S&P and Nasdaq had their second-straight losing week, off 1.2% and 2.6% respectively. The Dow Industrials have been down four weeks in a row.  Meanwhile, bonds rallied with the 10-year Treasury yield falling 10 basis points to 1.36%. 

On the other end, the payrolls showed a weaker-than-expected increase, climbing just 210,000 last month after an upwardly revised 546,000 gain in October. However, the jobless rate dropped to 4.2% as employment rose by more than a million in the report’s household survey. 

Through this rate expectations were pulled forward and there is now a 50% of a quarter-point rate hike in May, according to fed funds futures. 

Fed Chair Jerome Powell told Congress on Tuesday that it’s “probably a good time to retire that word”. He was referring to the term “transitory” when talking about inflation. 

As a result of the price pressures, the Fed is now considering a faster tapering to its asset purchase program, shifting gears to tighter monetary policy. 

Here are the closing levels on Friday: – 

 Last Change %Change 
Dow Jones 34,580.08 -59.71 -0.17% 
S&P 500 4538.43 -38.67 -0.84% 
Nasdaq Comp 15085.47 -295.85   -1.92% 
US 10Y 1.36%   
VIX 30.67 +2.72   -1.92% 

So, why are we here? 

It started with Omicron last week when it sent stocks down on fears of the fast-spreading variant. Reports of its arrival into the U.S. triggered another round of selling. 

Then, there was the Fed considering to quicken the tapering. Reserve bank of St. Louis President James Bullard said the payroll numbers were strong across the board and he favours ending the taper in March. 

What is surprising to me is that while we know little of the Omicron variant, early reports suggest that it is milder than Delta. In fact, there were some reports that suggested that it could be a blessing in disguise if it becomes the main variant. 

Maybe there is more to it but selling off on Covid seems a bit strange as we have been living with it for 2 years. 

The hawkish tone from the Fed has been on the wires for some time. Thus, with the selling response was so strong, it lead me to wonder as well. 

Could it be that the markets were blind to all this and just made new highs regardless and now is starting to see things more clearly? 

Or could it be as simple as the market needed a break and a retracement was long overdue? 

Whatever it is, the VIX at 30 is saying the markets are going to continue to be volatile in the near term. The bears have the control now, but I would not completely rule out the buyers on dip just yet.  

Source: CBOE, Reuters, Bloomberg  

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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